Assessable income

: Are the Payments you received in relation to the Fellowship assessable income?

: Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX

You were registered as a PhD candidate at a university located in Country Y and it is anticipated that you will continue to be registered until the date of your thesis defence. You and your partner, Person A, decided to move to Australia as you both wanted to spend a year abroad for your professional development. You both chose to apply for a research position/fellowship in Australia due to its high level of research and expertise in your fields. To aid you with your knowledge and studies you decided to apply for a position at the research department run by Person B. You contacted Person B in relation to a potential fellowship due to their knowledge and groundbreaking research in your field of study. Person B works at Organisation C and has their research funds with Organisation D. Organisation C is a leading research institution and Organisation D is a non-profit entity that raises funds for the research undertaken at Organisation C.

Following contact with Person B it became clear that while there was no paid position, you were welcome to participate in their research projects, with Person B offering to assist you in identifying appropriate grants to cover your travel and living expenses for the year. Person B contacted you to advise that they had communicated with representatives from companies in the relevant industry in relation to your fellowship for the following year. They indicated that Organisation X was open to this, referring you to Organisation X's web site. Person B requested that you open a submission and suggested that they would ask for a combined clinical and research fellowship. The following information was provided in relation to Organisation X's fellowships: •                     Organisation X provides support for both clinical and research fellowship programs. •                     Fellowship requests must be unsolicited and should not disclose the name of the fellow in the application. •                     Fellowship request must not provide tangible benefit to Organisation X.

•                     Funds from Organisation X are awarded to the requesting organisation and not given directly to the individual fellow. •                     Requesting organization must be registered for more than a specified period. •                     Requesting organisation must confirm receipt of payment and verify how funds were used for all previous Organisation X supported activities. •                     Fellowships are awarded to directly support salaries and limited fringe benefits of fellows, in line with fair market value and local standards. Organisations may not use awarded funds to defray operating expenses. •                     All recipient organisations must abide by the terms and conditions as outlined in the Organisation agreement/contract. The agreement/contract is issued to an authorised signatory of the organisation once an application is approved. A fully executed agreement/contract is required prior to the start of the program. Payment will be issued upon execution of the agreement/contract.

You prepared an application for the Organisation X fellowship to facilitate your travel to Australia, applying for a position at Person A's research department. The fellowship application was formally lodged by Person B which included the following information: Table 1: Fellowship application details The Institution Organisation C Principal investigator Person B Start and end date Specified dates for commencement and end Amount requested from Organisation X Specified amount How Organisation X support would be acknowledged Acknowledgement in all presentations and publications arising out of this fellowship. Project/Program objectives The fellow will have a range of clinical and research commitments. The main focus will be participation in an ongoing research program, which is being undertaken at Organisation C in collaboration with other organisations/institutions. It is anticipated that the fellow's stay would enable ongoing international collaboration which will continue beyond the duration of the proposed fellowship. Describe the development plan for the fellow

The fellow will be an international trainee from Country Y. They plan for a 12 month stay in Australia. During this time, they will be involved in both clinical and research work. Describe the Fellow's participation in non-experiential education (e.g. training). The fellow is expected to attend regular weekly departmental meetings, formal educational meetings and grand rounds. Monthly meetings, with active presentations in front of peers and junior staff during those meetings. Number of publications or congress presentations will the Fellow participate in Specified number, less than 5 Number of hours per week the Fellow will be with faculty members. Specified number of hours less than 30 Course Director Name Person B Type of fellowship/s being applied for Clinical fellowship and research fellowship The application for the fellowship (the Fellowship) was approved by Organisation X Australia. You did not take leave from your PhD in Country Y and continued to work on your PhD from your arrival in Australia.

It took some months after your arrival in Australia before you received approval from the relevant Australian regulatory body to allow you to commence research work at Organisation C. After you obtained approval to commence research work at Organisation C, Organisation D began disbursing the monthly stipend amounts into your Australian bank account during the period you undertook the research work at Organisation C (the Payments). You departed Australia approximately a year after your arrival.

Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-20 Income Tax Assessment Act 1997 section 11-15 Income Tax Assessment Act 1997 section 51-10 Income Tax Assessment Act 1997 section 51-35 Income Tax Assessment Act 1997 paragraph 51-35(e)

Ordinary income Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called ordinary income. Subsection 6-5(2) of the ITAA 1997 outlines that Australian residents are assessed on all ordinary income they derive directly or indirectly from all sources, whether in or out of Australia during an income year. Subsection 6-5(3) of the ITAA 1997 outlines that a foreign resident's assessable income includes: •                     ordinary income they have derived directly or indirectly from all Australian sources during the income year; and •                     other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: •                     are earned, •                     are expected, •                     are relied upon, and

•                     have an element of periodicity, recurrence or regularity. It is not necessary for all of the above indicators to be present for a receipt to be considered ordinary income. Ordinary income includes amounts received in return for personal services, whether received in the capacity of an employee or otherwise, and amounts received which the recipient relies on for the maintenance of themselves and/or their dependants. This will be so even if the receipt is not directly related to any service provided by the recipient to the donor ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540 ( Dixon's case )). In Dixon's case it was held that an amount paid to supplement income had the character of income under ordinary concepts. A voluntary payment or gift that is properly characterised, in the hands of the recipient, as a product or incident of employment or a reward for services (including for past services), is assessable income even if paid or given by a third party ( Moorhouse v Dooland (1955) Ch 284, Mews 2008 ATC 10-025; [2008] AATA 357. However, a voluntary payment or gift that is not related in any way to personal exertion will not be assessable ( Hayes

(1956) 11 ATD 68; (1956) 96 CLR 47. The Macquarie Online Dictionary defines a stipend as fixed or regular pay, a periodic payment or salary. A stipend paid on a periodic basis is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997 Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income, it is not assessable income. Application to your situation Following your interaction with Person B you became aware that there was no paid position in relation to their research projects and they assisted you in identifying an appropriate grant to cover your travel and living expenses for the year you planned on spending in Australia. You solicited the Fellowship grant through your application lodged by Person B with Organisation X, which was accepted. As outlined in Organisation X's Fellowships/XXXX information, the fellowships are awarded to directly support salaries of fellows, in line with fair market value and local standards. You received several stipend payments of $XX,XXX per month (the Payments) from Organisation D.

The Payments are considered to be ordinary income as they were periodic and regular payments that you expected to receive, and that you relied and depended upon to cover your expenses while you were in Australia and/or to use as you wanted. As the Payments are considered to be ordinary income, it is not necessary to consider whether they could also be statutory income. The Payments you received under the Fellowship will therefore form part of your assessable income unless they are exempted from being assessable income. Exempt income Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law. Certain amounts of ordinary income are exempt from income tax under section 51-1 of the ITAA 1997 if the amount is of a type covered by the tables in Division 51 of the ITAA 1997.

Section 11-15 of the ITAA 1997 lists certain types of exempt income, including Item 2.1A of the table in section 51-10 of the ITAA 1997, which makes exempt from income tax amounts paid as a scholarship, bursary, educational allowance, or educational assistance to a full-time student at a school, college or university, subject to exceptions and conditions listed in section 51-35 of the ITAA 1997. For a scholarship, bursary or other educational allowance to be exempt from income tax it must be provided principally for educational purposes. It is not enough that an educational purpose is a by-product or incidental purpose of the scholarship. In determining the purpose of the scholarship, bursary or other educational allowance it is the purpose of the payer and not the student that is relevant. Fellowship and scholarship payments are treated in the same way. Section 51-1 of the ITAA 1997 exempts from income tax ordinary income and statutory income covered by tables in sections 51-5 to 51-30 of the ITAA 1997. Item 2.1A of the table in section 51-10 of the ITAA 1997 provides an income tax exemption in relation to payments:

•                     to a full-time student at a school, college or university •                     made by way of a scholarship, bursary, educational allowance or educational assistance •                     subject to the exceptions set out in section 51-35 of the ITAA 1997. Exceptions under section 51-35 of the ITAA 1997 Section 51-35 of the ITAA 1997 states: The following payments made to or on behalf of a full-time student at a school, college or university are not exempt from income tax under item 2.1A of the table in section 51-10 of the ITAA 1997: a)            a payment by the Commonwealth for assistance for secondary education or in connection with education of isolated children b)            a Commonwealth education or training payment c)            a payment by an entity or authority on the condition that the student will (or will if required) become, or continue to be, an employee of the entity or authority d)            a payment by an entity or authority on the condition that the student will (or will if required) enter into, or continue to be a party to, a contract with the entity or authority that is wholly or principally for the labour of the student

e)            a payment under a scholarship where the scholarship is not provided principally for educational purposes f)            an education entry payment under Part 2.13A of the Social Security Act 1991 . Scholarship not provided principally for educational purposes To be exempt from income tax, the law specifies that the scholarship must be provided principally for educational purposes. This means there can be collateral advantages so long as the primary purpose is for educational purposes. It is not enough that an educational purpose is a by-product or incidental purpose of the scholarship. In determining the purpose of the scholarship, bursary or other educational allowance it is the purpose of the payer and not the student that is relevant. Research grants would usually be assessable, for example, a grant to a Doctor of Medicine to carry out special research, which he did at a university but not under its control or direction, was assessable as ordinary income (16 TBRD Case

R10). Amounts paid under a postgraduate research scholarship granted to a PhD student by a university out of funds provided by the Asthma Foundation were also not exempt as the Foundation financed the scholarship on the condition that the student would analyse, collate and prepare for publication the findings of a respiratory survey conducted on behalf of the Foundation as outlined in the case below. In FCT v. Hall (1975) 6 ALR 457; 75 ATC 4156; (1975) 5 ATR 450 ( Hall's case ) the taxpayer was offered a fellowship by the Asthma Foundation of Tasmania on the basis that he would undertake work in relation to a respiratory survey that the foundation was linked to. He then registered as a candidate for a Doctor of Medicine with the University of NSW with the basis of his doctorate research project being the respiratory survey. He received a scholarship from the university with funds provided by the foundation. The scholarship did not qualify for exemption under s 23(z) of Income Tax Assessment Act 1936

(predecessor to section 51-35 of the ITAA 1997) as the scholarship was not provided for educational purposes. On the evidence, the NSW Supreme Court found that the purpose of the foundation in providing the scholarship was not for the education of the recipient, but for the purposes of the foundation. Application to your situation As outlined above, when determining the purpose of the Payments it is the purpose of the payer and not the recipient that is relevant. We have taken the following into consideration when determining whether paragraph 51-35(e) of the ITAA 1997 will apply to exclude the Payments from being exempt from income tax under Item 2.1A in the table in section 51-10 of the ITAA 1997. After it was identified that there was not a paying position in relation to the projects being run by Person B at Organisation C, Person B played a major role in seeking funding so that you could assist with their projects and identified Organisation X as being an organisation that may be willing to assist with the funding.

Person B assisted you with the Organisation X application in which Person B identified the projects they were running at Organisation C and what activities the successful fellow would undertake in relation to their projects. They lodged the application with Organisation X so that you could work on the projects they were undertaking at no expense to either Organisation C or Organisation D, for the purposes of Organisation C and Organisation D. Organisation X is stimulating research and clinical activities by providing fellowships which involves activities being conducted within organisations that are independent of Organisation X, with Organisations C and D being the organisations in this situation. While Organisation X funded the Fellowship, they did not make any payments directly to you, but supplied the amount granted under the Fellowship to Organisation D, which made the Payments to you. Organisation D was the direct payer of the Payments to you. It is noted that the objectives of Organisations C and D are aligned as Organisation D raises funds for the research undertaken at Organisation C.

By making the Payments to you, Organisation C/D received the benefit of a researcher working on their projects that were run by Person B. It was Person B who sought out funding for a fellowship for you so you could assist him with his projects at Organisation C. Although you prepared the fellowship application, it was Person B who lodged the application which listed Organisation C as the relevant institution. Person B placed much emphasis on the work you would carry out with Person B's group of clinicians and researchers. Although Person B noted that you would benefit from this, that benefit was to be the experience and knowledge you would gain from undertaking the work. That is, it was expected that the educational benefit you would receive was as a by-product of the work undertaken.

Although you attended educational meetings and grand rounds, and made presentations at meetings, they were related to the research and clinical work you undertook for Person B's projects and ancillary to that work. Organisation C/D did not provide you with training unconnected to your project work such as tutorials or lectures. It is noted that during the period you were receiving the Payments, you attended one external workshop. However, as was anticipated when the Fellowship was applied for, the majority of the educational benefit you ultimately gained during the period you received the Payments was a by-product of the research and clinical work you performed.

Generally, scholarships provided principally for educational purposes are paid to the student for the duration of their study after they are awarded the scholarship. Alternatively, the scholarship is for a set period unrelated to any period the student may be undertaking work for the payer (for example, a payer may provide a scholarship to a student for 2 years and the student gains practical experience undertaking research work for them during semester breaks only). In these situations, it is clear the principal purpose of the payer is to help the student while they are studying and there is no connection between the scholarship and any work for the payer.

However, in contrast in your case Organisation C/D only sought to acquire the funding to be able to pay you during the period that they expected you would be undertaking work on their projects. Also, although your fellowship application sets out a start date shortly after your arrival in Australia, Organisation D delayed making payments to you for several months until you received official approval from the relevant regulatory body to commence research work at Organisation C. This is despite you undertaking activities in relation to your PhD since your arrival in Australia. Also, you continued your PhD after you stopped undertaking research work on Organisation C/D projects but your Payments ceased once your work on their projects ceased.

It is not considered that the principal concern of Organisation C/D was to help you in your studies as they only sought to arrange for funding to be able to pay you for the period you undertook research work for them. They did not seek to arrange funding for you for the remaining duration of your PhD studies which it is considered what they would have done if their primary goal was purely a benevolent one being your education. They were willing to help you with your education where it aligned with their research work but did not try to arrange for funding for you for your education when there was no benefit to them. The fact that they delayed making Payments to you until you could undertake research work at Organisation C also demonstrates that the Payments were not principally for your education. Although the work you performed in relation to the Fellowship assisted you with your education, others benefited as well. Your work on Organisation C/D projects furthered the objectives of Organisation C/D. In summary, it is considered that the Payments were not made to you by Organisation D principally for your education given that:

•                     Organisation C/D only sought funding to make the Payments to you for the time they expected you to be working on their projects rather than attempting to help you for the duration of your PhD studies; •                     Although you were studying your PhD at the time, Organisation D delayed making the Payments to you until you could undertake work for them at Organisation C; •                     They benefited from the work you performed while receiving the Payments; and •                     Essentially, your education during the period you received the Payments was a by-product of the work you undertook. Having regard to the above, it is considered that in securing funding and then making the Payments to you, Organisation D's principal objective was to obtain your services to undertake work in relation to Organisation C/D projects rather than to assist you in your education. Therefore, paragraph 51-35(e) of the ITAA 1997 will apply to exclude the Payments from being exempt from income tax. Accordingly, the Payments you received in relation to the Fellowship are assessable as ordinary income.

It is noted that the source funding for the Payments made to you by Organisation D were originally obtained from Organisation X Australia who did not receive any benefit from providing the source funding. However, it is considered that it is the purpose of Organisation D that is paramount as Organisation C/D sought out the funding and then used it to make the Payments to you. If Organisation C/D already had sufficient existing funding to make fellowship payments to you while you undertook work on their projects then we would regard those fellowship payments as being made principally for the project work rather than for your education. We do not consider the fact that Organisation C/D did not have sufficient existing funding and so sought out new funding in order for them to make the Payments changes the purpose of those Payments from being principally for the project work to principally for your education. Double taxation agreement In determining liability to Australian tax on income it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one. The Agreements Act contains the double tax agreement between Australia and Country Y (the DTA). The DTA includes the following Articles: Article 21 Students Payments which a student who is, or was immediately before visiting one of the States, a resident of the other State and who is temporarily present in the first-mentioned State solely for the purpose of his education receives from sources outside that first-mentioned State for the purpose of his maintenance or education shall be exempt from tax in that first-mentioned State. Article 22 Income of dual resident Where a person, who by reason of the provisions of paragraph (1) of Article 4 is a resident of both States but by reason of the provisions of paragraph (3) or (4) of that Article is deemed for the purposes of this Agreement to be a resident solely of one of the States, derives income from sources in that State or from sources outside both States, that income shall be taxable only in that State. Application to your situation

When considering whether the DTA will provide for an exemption for the Payments being assessable in Australia the relevant articles are Articles 21 and 22 as provided above. In your situation the funding for the fellowship originated from Organisation X Australia, with the Payments then being paid by Organisation D to you. Therefore: •                     Although you were a resident of Country Y prior to coming to Australia, the Payments were sourced from Australia and consequently Article 21 of the DTA will not apply to exempt the Payments from tax in Australia; and •                     As the Payments were sourced in Australia, Article 22 of the DTA will not apply to prevent the Payments being taxed in Australia. That is, the DTA does not prevent Australia from taxing the Payments. Conclusion As outlined above, the Payments are assessable in Australia because: •                     The Payments are assessable as ordinary income under section 6-5 of the ITAA 1997.

•                     Paragraph 51-35(e) of the ITAA 1997 will apply to exclude the Payments from being exempt from income tax under Item 2.1A in the table in section 51-10 of the ITAA 1997. Therefore, they are assessable as ordinary income; and •                     The DTA does not have any article that would prevent Australia from taxing the Payments. Therefore, the Payments are assessable in Australia.